##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year ended December 31, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___to ___
 Commission File Number 001-14053
 Milestone Scientific Inc.
 (Name of Small Business Issuer in its Charter)
 Delaware
    
    13-3545623(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
  
 
 :
    o
 þ o
 þ
 o þ
    DOCUMENTS INCORPORATED BY REFERENCE
 o þ




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##### 



MILESTONE SCIENTIFIC INC.
 Form 10-KSB Annual Report
 TABLE OF CONTENTS
 PagePART IItem 1. Description of Business
    
    
    4Item 2. Description of Property
    
    
    15Item 3. Legal Proceedings
    
    
    15Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15PART IIItem 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases
Of Equity Securities
    
    
    16Item 6. Managements Discussion and Analysis or Plan of Operation
    
    
    18Item 7. Financial Statements
    
    
    27Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    27Item 8A. Controls and Procedures
    
    
    27PART IIIItem 9. Directors, Executive Officers, Promoters and Control Persons and Corporate Governance;
Compliance with Section 16 (a) of the Exchange Act
    
    
    28Item 10. Executive Compensation
    
    
    30Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    33Item 12. Certain Relationships and Related Transactions, and Director Independence
    
    
    35Item 13. Exhibits
    
    
    36Item 14. Principal Accountant Fees and Services
    
    
    38SIGNATURES
    
    
    39EXHIBITS
    
    
    40EX-23.1: CONSENT OF EISNER LLPEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
  FORWARD-LOOKING STATEMENTS
 Certain statements made in this Annual Report on Form 10-KSB are forward-looking statements
(within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans
and objectives of management for future operations. Such statements involve known and unknown
risks, uncertainties and other factors that may cause actual results, performance or achievements
of Milestone to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. The forward-looking statements included
herein are based on current expectations that involve numerous risks and uncertainties.
Milestones plans and objectives are based, in part, on assumptions involving the continued
expansion of business. Assumptions relating to the foregoing involve judgments with respect to,
among other things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and many of which are
beyond the control of Milestone. Although Milestone believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove inaccurate. In light
of the significant uncertainties inherent in the forward-looking statements included herein,
particularly in view of Milestones early stage operations, the inclusion of such information
should not be regarded as a representation by Milestone or any other person that the objectives and
plans of Milestone will be achieved. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
 2




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##### Table of Contents



PART I
 
 Item 1. Description of Business
 CompuDent ® ,
CompuMed ® , CompuFlo  , The Wand ® , The
WandPlus ® , The
SafetyWand  and CoolBlueWand  CoolBlue Tooth Whitening System  ,
DPS  Dynamic Pressure Sensing Technology STA  Single Tooth Anesthesia Ionic White ® Ionic White 
 BUSINESS
 Background
  CompuFlo  . CompuFlo
 CompuFlo
 TheWand  (CompuDent  Wand  CompuDent CompuDent
 CompuMed 
 CompuFlo Single Tooth Anesthesia STA  STA STA
  CompuFlo Advanced Injection Technology  Core Technology
 CompuFlo, CompuFlo CompuFlo
 3




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##### Table of Contents



CompuFlo
 CompuFlo
 CompuFlo
 CompuFlo
  CompuFlo th
 CompuFlo CompuFlo CompuFlo
 CompuFlo CompuFlo
 4




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##### Table of Contents



Product Platform
  CompuDent 
 CompuDent CompuDent CompuDent The Wand)
 
    
    CompuDentminimizes the pain associated with palatal, mandibular block and other
injections, resulting in a more comfortable injection experience for the patient;
    
    the pencil grip used with The Wandhandpiece allows unprecedented tactile sense and
accurate control;
    
    new injections made possible with the CompuDenttechnology eliminate collateral numbness
of the tongue, lips and facial muscles;
    
    bi-directional rotation of The Wandhandpiece eliminates needle deflection resulting in
greater success and more rapid onset of anesthesia in mandibular block injections;
    
    the use of a single patient use, disposable handpiece minimizes the risk of cross
contamination;
    
    the ergonomic design of The Wandhandpiece makes an injection easier and less stressful
to administer, lowering the risk of carpal tunnel syndrome.
 CompuDents
 Single Tooth Anesthesia (STA  )
 STA CompuFlo CompuDent CompuDent
 CompuMed 
 5




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##### Table of Contents



CompuMed CompuDent. CompuMed CompuMed
 The Wand ®
 The Wand  STA CompuDent or CompuMed The Wand
 The SafetyWand 
 SafetyWand SafetyWand SafetyWand
 SafetyWand SafetyWand SafetyWand CompuDent
 Tooth Whitening
 CoolBlue Wand Ionic White, CoolBlue
 The CoolBlue Wand 
 CoolBlue Wand
 6




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##### Table of Contents



Ionic White 
 Ionic White Ionic White Ionic White
 Competition
 SafetyWand
 CompuDent CompuDent
 CoolBlue Ionic White,
  7




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##### Table of Contents



Patents And Intellectual Property
  U.S. PATENT
    
    DATE OFNUMBER
    
    ISSUEComputer Controlled Drug Delivery SystemsHypodermic Anesthetic Injection Method
    
    
    4,747,824
    
    
    
    05/31/88Hypodermic Anesthetic Injection Apparatus & Method
    
    
    5,180,371
    
    
    
    01/19/93(CompuFlo, CompuMed, and CompuDent)Dental Anesthetic and Delivery Injection Unit
    
    
    6,022,337
    
    
    
    02/08/00Design for a Dental Anesthetic Delivery System Holder
    
    
    D422,361
    
    
    
    04/04/00Design for a Dental Anesthetic Delivery System Housing
    
    
    D423,665
    
    
    
    04/25/00Design for a Dental Anesthetic Delivery System Handle
    
    
    D427,314
    
    
    
    06/27/00Dental Anesthetic Delivery Injection Unit
    
    
    6,132,414
    
    
    
    10/17/00Dental Anesthetic Delivery Injection Unit
    
    
    6,152,734
    
    
    
    11/28/00Dental Anesthetic and Delivery Injection Unit with Automated Rate Control
    
    
    6,652,482
    
    
    
    11/25/03Pressure/Force Computer Controlled Drug Delivery System
    
    
    6,200,289
    
    
    
    03/13/01Pressure/Force Computer Controlled Drug Delivery System with Exit Pressure
    
    
    6,786,885
    
    
    
    09/14/04Pressure/Force Computer Controlled Drug Delivery System with Automated Charging
    
    
    6,887,216
    
    
    
    05/03/05Drug Delivery System with Profiles
    
    
    6,945,954
    
    
    
    09/20/05Engineered Sharps Injury Protection DevicesHandpiece for Injection Device with a Retractable and Rotating Needle
    
    
    6,428,517
    
    
    
    08/06/02Safety IV Catheter Device
    
    
    6,726,658
    
    
    
    04/27/04Safety IV Catheter Infusion Device
    
    
    6,905,482
    
    
    
    06/14/05Handpiece for Injection Device with a Retractable and Rotating Needle
    
    
    6,966,899
    
    
    
    11/22/05OtherApparatus and Method for Sterilizing, Destroying and Encapsulating
Medical Implement Wastes
    
    
    4,992,217
    
    
    
    02/12/91Apparatus and Method for Verifiably Sterilizing Destroying and
Encapsulating Regulated Medical Wastes
    
    
    5,078,924
    
    
    
    01/07/92Apparatus and Method for Verifiably Sterilizing, Destroying and
Encapsulating Regulated Medical Wastes
    
    
    5,401,444
    
    
    
    03/28/95Self-Sterilizing Hypodermic Syringe and Method
    
    
    5,512,730
    
    
    
    04/30/96Hypodermic Syringe and Method
    
    
    4,877,934
    
    
    
    12/19/88Self-Sterilizing Hypodermic Syringe and Method
    
    
    5,693,026
    
    
    
    12/02/97
 CompuFlo CompuFlo
  CompuFlo .
 8




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CompuDent
  Government Regulation
 CompuDent CompuMed SafetyWand
   9




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##### Table of Contents



CompuDent SafetyWand CompuMed
    SafetyWand The Wand CompuDent
 Product Liability
  Employees
  10




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##### Table of Contents



CompuDent
 CERTAIN RIS FACTORS THAT MAY AFFECT GROWTH AND PROFITABILITY
  We have no history of profitable operations. Continuing losses could exhaust our capital resources
and force us to discontinue operations.
 CompuDent
 We cannot become successful unless we gain greater market acceptance for our products and
technology.
 CompuDent SafetyWand CompuMed CompuFlo CompuDent
 Our limited distribution channels must be expanded for us to become successful.
  We depend on three principal manufacturers. If we cannot maintain our existing relationships or
develop new ones, we may have to cease our operations
 CompuDent CompuMed CompuDent CompuMed
 We may be subject to product liability claims that are not fully covered by our insurance and that
could put us under financial strain.
 11




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##### Table of Contents



We rely on the continuing services of our Chairman and Chief Executive Officer, Chief Operating
Officer, President and Director of Clinical Affairs.
  The market price of our common stock has been volatile and may continue to fluctuate significantly
because of various factors, some of which are beyond our control.
  We are controlled by a limited number of shareholders.
  Future sales or the potential for sale of a substantial number of shares of our common stock could
cause the trading price of our common stock and warrants to decline and could impair our ability to
raise capital through subsequent equity offerings.
  The decrease of our outstanding shares as a result of the reverse stock split, without change to
our authorized capitalization, increased the ability of our Board of Directors to issue shares
without stockholder approval. Issuance of shares may dilute the value of our outstanding shares or
have a negative impact on the trading price of the common stock.
  12




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Implementation of procedures to comply with the Sarbanes-Oxley Act and SEC rules concerning
internal controls may be so costly that compliance could have an adverse effect on us.
  
 Item 2. Description of Property
   
 Item 3. Legal Proceedings
  
 Item 4. Submission of matters to a Vote of Security Holders
 .
 13




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PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
 Market Information
  Common Stock
  HIGH
    
    LOW2006First Quarter
    
    $
    1.64
    
    
    $
    1.00Second Quarter
    
    $
    1.25
    
    
    $
    .81Third Quarter
    
    $
    1.50
    
    
    $
    .80Fourth Quarter
    
    $
    1.40
    
    
    $
    .902005First Quarter
    
    $
    4.11
    
    
    $
    1.72Second Quarter
    
    $
    3.98
    
    
    $
    2.22Third Quarter
    
    $
    2.70
    
    
    $
    1.75Fourth Quarter
    
    $
    2.04
    
    
    $
    1.17
 Warrants
  HIGH
    
    LOW2006First Quarter
    
    $
    .35
    
    
    $
    .21Second Quarter
    
    $
    .40
    
    
    $
    .11Third Quarter
    
    $
    .25
    
    
    $
    .11Fourth Quarter
    
    $
    .30
    
    
    $
    .16
 HIGH
    
    LOW2005First Quarter
    
    $
    .80
    
    
    $
    .27Second Quarter
    
    $
    .70
    
    
    $
    .36Third Quarter
    
    $
    .48
    
    
    $
    .25Fourth Quarter
    
    $
    .34
    
    
    $
    .22
 14




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##### Table of Contents



Holders
  Dividends
   Sales of Unregistered Securities
  
 ITEM 6. Managements Discussion and Analysis or Plan of Operation.
  OVERVIEW
  
    
    refine our tactical approach to product sales and marketing in order to increase
penetration of the global dental and medical markets with our proprietary
computer-controlled injection technologies;
    
    continue and enhance our product development efforts associated with our pressure force
technology for both dental and medical applications; and
    
    advance our regulatory, clinical and intellectual property efforts to strengthen our
product positioning in both the consumer and professional tooth whitening markets.
   15




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Single Tooth Anesthesia STA
 STA CompuDent
 STA
 CompuFlo CompuFlo CompuFlo
 CompuFlo
  CoolBlue CoolBlue CoolBlue CoolBlue
 Ionic White Ionic White
  16




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Twelve Months Ended December 31,2006
    
    
    2005DOMESTICCompuDent
    
    $
    968,821
    
    
    
    23.4
    %
    
    $
    1,363,705
    
    
    
    31.5
    %Handpieces
    
    
    2,998,906
    
    
    
    72.3
    %
    
    
    2,762,944
    
    
    
    64.0
    %Other
    
    
    179,553
    
    
    
    4.3
    %
    
    
    196,409
    
    
    
    4.5
    %Total Domestic
    
    $
    4,147,280
    
    
    
    100.0
    %
    
    $
    4,323,058
    
    
    
    100.0
    %INTERNATIONALCompuDent
    
    $
    492,871
    
    
    
    34.7
    %
    
    $
    506,136
    
    
    
    34.8
    %Handpieces
    
    
    816,735
    
    
    
    57.6
    %
    
    
    854,718
    
    
    
    58.9
    %Other
    
    
    109,539
    
    
    
    7.7
    %
    
    
    91,482
    
    
    
    6.3
    %Total International
    
    $
    1,419,145
    
    
    
    100.0
    %
    
    $
    1,452,336
    
    
    
    100.0
    %DOMESTIC/INTERNATIONAL ANALYSISDomestic
    
    $
    4,147,280
    
    
    
    74.5
    %
    
    $
    4,323,058
    
    
    
    74.9
    %International
    
    
    1,419,145
    
    
    
    25.5
    %
    
    
    1,452,336
    
    
    
    25.1
    %Total Product Sales
    
    $
    5,566,425
    
    
    
    100.0
    %
    
    $
    5,775,394
    
    
    
    100.0
    %
  Single Tooth Anesthesia (STA) CompuFlo CompuDent, CompuMed
  Tooth Whitening and Curing
 
    
    transferring manufacturing of the Cool BlueLight System from Tricor Systems, Inc.,
our manufacturer of the CompuDentsystems;
    
    paying fees associated with applying for U.S. patent protection on our Ionic White
consumer teeth whitening system; and
    
    paying fees associated with securing a CE mark for our Cool Blueprofessional teeth
whitening system.
 CompuFlo
 
    
    developing new software for the epidural clinical studies;
    
    additional engineering effort to make the software suitable for clinical studies;
    
    researching related activities to support the software development and clinical trials;
    
    paying legal fees related to the submission of the 510(k) to the FDA; and
    
    commissioning an in-depth market research study from Biotech Marketing Alliance to
determine potential market applications for our CompuFlotechnology.
 Single Tooth Anesthetic System
 17




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##### Table of Contents




    
    developing the next generation product for the dental market  a new unit which
incorporates the pressure sensing technology from the CompuFloand marries it to the
core technology underlying the CompuDentsystem;
    
    paying legal fees related to the submission of the 510(k) to the FDA; and
    
    paying fees associated with the engagement of Corestrength, Inc., a professional
sales and marketing company who will be providing comprehensive field support to
Milestone and its distributor by way of traveling with distributor sales
representatives, collaborating on sales presentations to potential customers, training
sales reps and end-users, and participating in trade shows and conferences.
 Direct to Consumer Marketing
 
    
    developing and implementing a targeted radio campaign to increase awareness of our
computer controlled anesthetic delivery systems in the dental market; and
    
    launching this campaign into the Indianapolis market in August through December of
2005.
 Current Product Platform
  CompuDent 
 CompuDent CompuDent CompuDent The Wand)
 
    
    CompuDentminimizes the pain associated with palatal, mandibular block and other
injections, resulting in a more comfortable injection experience for the patient;
    
    the pencil grip used with The Wandhandpiece allows unprecedented tactile sense and
accurate control;
    
    new injections made possible with the CompuDenttechnology eliminate collateral numbness
of the tongue, lips and facial muscles;
    
    bi-directional rotation of The Wandhandpiece eliminates needle deflection resulting in
greater success and more rapid onset of anesthesia in mandibular block injections;
    
    the use of a single patient use, disposable handpiece minimizes the risk of cross
contamination;
    
    the ergonomic design of The Wandhandpiece makes an injection easier and less stressful
to administer, lowering the risk of carpal tunnel syndrome.
 CompuDents
 CompuDent
 18




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##### Table of Contents



STA
 Single Tooth Anesthesia (STA  )
 STA CompuFlo CompuDent CompuDent STA
 STA nd
 STA STA
 CompuMed 
 CompuMed CompuDent. CompuMed CompuMed
 The Wand ®
 The Wand  STA CompuDent or CompuMed The Wand
 The SafetyWand 
 SafetyWand SafetyWand SafetyWand
 19




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##### Table of Contents



SafetyWand SafetyWand SafetyWand CompuDent
 Tooth Whitening
 CoolBlue Wand Ionic White, CoolBlue
 The CoolBlue WandThe CoolBlue Wandis a proprietary, cost efficient dental enhancement system that uses blue
light emitting diodes for fast curing of dental composite material, trans-illumination of teeth
tacking of veneers, and activation of whitening gels and pastes. In addition, the system enables
dentists to interchange attachments for use in cosmetic dentistry and diagnostics.Towards the end of 2005, we announced the market launch of the CoolBluesystem, with the
intent of targeting the $5 billion worldwide teeth whitening market. The CoolBluesystem was
designed to maximize long-term recurring revenues from disposable per-patient kits that are
utilized in the whitening treatment process. Although we initially received favorable feedback from
early adopters within the dental profession on CoolBlues overall performance, there were
reoccurring problems reported associated with product packaging. We have since
addressed the packaging issue and have made the strategic decision to forestall market
re-introduction until such time as we receive a CE mark, enabling us to re-launch CoolBlueon a
global basis through our worldwide distribution network. A CE mark is a declaration on
manufactured products sold in the European Union (EU) certifying that the item meets all the
requirements of relevant EU directives.
 Ionic White 
 Ionic White Ionic White Ionic White
 Ionic White Ionic White
 Technology Rights
 20




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##### Table of Contents



SafetyWand, CompuFlo CompuDent
 CoolBlue Ionic White CoolBlue Ionic White CoolBlue Ionic White
 Summary of Critical Accounting Policies and Significant Judgments and Estimates
   Accounts Receivable
  Inventories
  Impairment of Long-Lived Assets
  Revenue Recognition
   Results of Operations
 21




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Twelve Months EndedDecember 31, 2006
    
    
    December 31, 2005Products sales, net
    
    $
    5,566,425
    
    
    
    95
    %
    
    $
    5,775,394
    
    
    
    90
    %Royalty income
    
    
    277,752
    
    
    
    5
    %
    
    
    657,754
    
    
    
    10
    %Total revenue
    
    
    5,844,177
    
    
    
    100
    %
    
    
    6,433,148
    
    
    
    100
    %Cost of products sold
    
    
    3,002,615
    
    
    
    51
    %
    
    
    2,521,022
    
    
    
    39
    %Royalty expense
    
    
    33,031
    
    
    
    1
    %
    
    
    78,930
    
    
    
    1
    %Total cost of revenue
    
    
    3,035,646
    
    
    
    52
    %
    
    
    2,599,952
    
    
    
    40
    %Gross Profit
    
    
    2,808,531
    
    
    
    48
    %
    
    
    3,833,196
    
    
    
    60
    %Selling, general and
administrative expenses
    
    
    5,326,032
    
    
    
    91
    %
    
    
    6,794,032
    
    
    
    106
    %Research and
development expenses
    
    
    1,005,285
    
    
    
    17
    %
    
    
    286,260
    
    
    
    4
    %Operating expenses
    
    
    6,331,317
    
    
    
    108
    %
    
    
    7,080,292
    
    
    
    110
    %Loss from operations
    
    
    (3,522,786
    )
    
    
    -60
    %
    
    
    (3,247,096
    )
    
    
    -50
    %Other income
    
    
    283,107
    
    
    
    5
    %
    
    
    400,000
    
    
    
    6
    %Interest Income
    
    
    87,411
    
    
    
    1
    %
    
    
    92,869
    
    
    
    2
    %Net loss
    
    $
    (3,152,268
    )
    
    
    -54
    %
    
    $
    $(2,754,227
    )
    
    
    -42
    %
 Year ended December 31, 2006 compared to year ended December 31, 2005
 CompuDent CompuMed, CompuDent CompuMed Wand CompuDent CompuMed CoolBlue Ionic White
 Ionic White
  22




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Liquidity and Capital Resources
     Recent Accounting Pronouncements
   23




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Accounting for Certain Hybrid Financial Instruments  an amendment of FASB Statement No. 133 and
140
 Accounting Changes and Error Corrections
 Share-Based Payment
 Inventory Costs, an amendment of ARB No. 43,
Chapter 4 (FAS 151)
 
 Item 7. Financial Statements
  
 Item 8. Change in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 8A. Controls and Procedures
  24




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Item 8B. Other Information
  
 PART III
 
 Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance With Section 16 (a) of the Exchange Act.
  NAME
    
    AGE
    
    POSITION
    
    DIRECTOR SINCELeonard A. Osser
    
    59
    
    Chairman and Chief Executive Officer
    
    1991Thomas R. Ronca
    
    60
    
    Chief Operating Officer & PresidentDavid Cohn
    
    55
    
    Chief Financial OfficerPablo F.Serna C
    
    31
    
    Director
    
    2006Leonard M. Schiller(1)(2)
    
    65
    
    Director
    
    1997Jeffrey Fuller(1)(2)
    
    61
    
    Director
    
    2003Leslie Bernhard(1)
    
    62
    
    Director
    
    2003
 
 (1)
    
    Member of the Audit Committee(2)
    
    Member of the Compensation Committee Key Personnel
  NAME
    
    AGE
    
    POSITIONEugene Casagrande, D.D.S.
    
    
    62
    
    
    Director of Professional RelationsMark Hochman, D.D.S.
    
    
    48
    
    
    Director of Clinical Affairs
   25




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Section 16(a) Beneficial Ownership Reporting Compliance
 26




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Code of Ethics
 www.milesci.com
 
 Item 10. Executive Compensation.
  SUMMARY OF COMPENSATION TABLE
 OptionNAME AND PRINCIPAL POSITION
    
    YEAR
    
    Salary
    
    Awards
    
    TotalLeonard A. Osser
    
    
    2006
    
    
    $
    300,000
    (1)
    
    
    
    
    
    $
    300,000Chief Executive OfficerThomas R. Ronca
    
    
    2006
    
    
    $
    192,970
    (2)
    
    $
    10,844
    (3)
    
    $
    203,814President and Chief Operating Officer
 
 (1)
    
    Includes $150,000 in deferred compensation in accordance with his employment
agreement to be paid in common stock and not paid until the termination of the agreement in
2010 or thereafter, if further extended. Excludes $1,299 paid by Milestone to Marilyn Elson, a
certified public accountant, in payment of tax consultation services. Ms. Elson is the wife of
Mr. Osser.(2)
    
    $28,333 of Mr. Roncas base salary for 2006 was paid in 26,984 shares of restricted common
stock.(3)
    
    The amounts in this column reflect the expense recognized for financial statement
reporting purposes for the fiscal year ended December 31, 2006, in accordance with FAS 123(R),
Share-based Payments. for outstanding stock options granted as part of the stock option
plan. For details used in the assumption calculating the fair value of the option reward, see
Note B to our Financial Statements for the year ended December 31, 2006, which is located on
pages F-7 through F-11 of our Annual Report on Form 10-KSB. Compensation cost is generally
recognized over the vesting period of the award. The number of shares underlying this option
award totaled 10,000 shares. See the table below entitled Outstanding Equity Awards at
December 31, 2006. 27




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Employment Contracts
   Objective of Our Executive Compensation Program
      28




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##### Table of Contents



Outstanding Equity Awards at December 31, 2006
  Option AwardsNumber ofSecuritiesUnderlyingUnexercised
    
    Option
    
    OptionOptions
    
    Exercise
    
    ExpirationName
    
    Exercisable
    
    Price ($)
    
    DateLeonard Osser
    
    
    16,667
    (1)
    
    
    1.65
    
    
    
    1/1/200716,667
    (2)
    
    
    0.87
    
    
    
    1/1/2008Thomas Ronca
    
    
    10,000
    (3)
    
    
    1.50
    
    
    
    9/26/2011
 
 (1)
    
    Fully vested(2)
    
    Fully vests on 7-1-06(3)
    
    Options for 5,000 shares of Common Stock vest on 3/26/2008 and 9/26/2009 Compensation of Directors
   Director Compensation
 29




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##### Table of Contents



Name
    
    Option Awards (1)
    
    TotalLeonard M. Schiller
    
    $
    16,600
    (2)
    
    $
    16,600Jeffrey Fuller
    
    $
    16,600
    (2)
    
    $
    16,600Leslie Bernhard
    
    $
    16,600
    (2)
    
    $
    16,600Pablo F. Serna C.
    
    $
    16,600
    (2)
    
    $
    16,600
 
 (1)
    
    Amounts are calculated using the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123R,
Share-based Payments.(2)
    
    On June 20, 2006, each of Milestones independent
directors was awarded options exercisable for 20,000 shares of our
common stock at $0.83 per share. 30




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##### Table of Contents



Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  Shares ofCommon StockBeneficially
    
    Percentage ofName of Beneficial Owner (1)
    
    Owned (2)
    
    OwnershipExecutive Officers and DirectorsLeonard Osser
    
    
    1,670,135
    (3)
    
    
    14.32
    %Thomas R. Ronca
    
    
    36,205
    
    
    
    *David Cohn
    
    
    10,994
    
    
    
    *Leonard M. Schiller
    
    
    68,432
    (4)
    
    
    *F. Pablo
Serda C.
    
    
    20,000Jeffrey Fuller
    
    
    66,667
    (5)
    
    
    *Leslie Bernhard
    
    
    66,667
    (6)
    
    
    *All directors & executive
officers as a group (7 persons)
    
    
    1,939,100
    
    
    
    16.14
    %K. Tucker Andersen
    
    
    1,603,582
    (7)
    
    
    13.75
    %
 
 *
    
    Less than 1%(1)
    
    The addresses of the persons named in this table are as follows: Leonard A. Osser, Thomas
R. Ronca, and David Cohn are all at 220 South Orange Avenue, Livingston Corporate Park,
Livingston, NJ 07039; Leonard M. Schiller, Schiller, Klein & McElroy, P.C., 33 North Dearborn
Street, Suite 1030, Chicago, Illinois 60602; Jeffrey Fuller, Eagle Chase, Woodbury, NY 11797;
Leslie Bernhard, AdStar, Inc., 4553 Glencoe Avenue, Suite 325, Marina del Rey, California
90292; K. Tucker Anderson, c/o Cumberland Associates LLC, 1114 Avenue of the Americas, New
York, New York 10036.(2)
    
    A person is deemed to be a beneficial owner of securities that can be acquired by such
person within 60 days from March 30, 2007 upon the exercise of options and warrants or
conversion of convertible securities. Each beneficial owners percentage ownership is
determined by assuming that options, warrants and convertible securities that are held by
such person (but not held by any other person) and that are exercisable or convertible within
60 days from the filing of this report have been exercised or converted. Except as otherwise
indicated, and subject to applicable community property and similar laws, each of the persons
named has sole voting and investment power with respect to the shares shown as beneficially
owned. All percentages are determined based on the number of all shares, including those
underlying options exercisable within 60 days from the filing of this report held by the
named individual, divided by 11,674,304 outstanding shares on March 30, 2007 plus those
shares underlying options exercisable within 60 days from the filing of this report held by
the named individual or the group.(3)
    
    Includes 325,722 shares issuable upon exercise of stock options within 60 days of the
date hereof as follows: 204,728 shares at $6.00 per share and 120,994 shares issuable upon
the exercise of warrants within 60 days of the date hereof, which are exercisable at $4.89.(4)
    
    Includes 66,667 shares subject to stock options, exercisable within 60 days of the date
hereof as follows: 6,667 shares at $1.50 per share, 20,000 shares at $3.27 per share, 20,000
shares at $1.40 per share and 20,000 shares at $.83 per share.(5)
    
    Includes 66,667 shares subject to stock options, exercisable within 60 days of the date
hereof as follows: 6,667 shares at $1.50 per share, 20,000 shares at $3.27 per share, 20,000
shares at $1.40 per 31




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##### Table of Contents



share. and 20,000 shares at $.83 per share.(6)
    
    Includes 66,667 shares subject to stock options, exercisable within 60 days of the date
hereof as follows: 6,667 shares at $1.50 per share, 20,000 shares at $3.27 per share, 20,000
shares at $1.40 per share. and 20,000 shares at $.83 per share.(7)
    
    Includes 303,559 shares subject to warrants all of which are exercisable within 60
days of the date hereof at prices ranging from $4.89 to $6.00. Securities Authorized for Issuance Under Equity Compensation Plans
 Equity Compensation Plan Information
  Number of Securities (1) to
    
    
    
    
    
    Number of securities (1)be issued upon exercise of
    
    Weighted-average exercise
    
    remaining available foroutstanding options and
    
    price of outstanding
    
    future issuance underwarrants
    
    options and warrants
    
    equity compensation planEquity compensation plan
approved by stockholders (1)Grants under our 1997 Stock Option Plan
    
    
    171,834
    
    
    $
    2.81
    
    
    
    142,166Grants under our 2004 Stock Option Plan
    
    
    256,000
    
    
    
    1.21
    
    
    
    244,000Equity compensation plan
not approved by stockholders (2)Aggregate individual option and warrant grants
    
    
    3,137,253
    
    
    
    4.80
    
    
    Not applicableTotal
    
    
    3,565,087
    
    
    
    4.48
 
 (1)
    
    Consisting of our 1997 stock option plan covering a total of 333,333 common shares
underlying options issuable to officers and other key employees and excluding 2,333 options,
which were exercised in October 2003, 16,667 options, which were exercised in December 2003,
and 333 options which were exercised in April 2005. The plan has a term of 10 years and is
administered by a committee appointed by the board of directors. The committee, in its sole
discretion, determines who is eligible to receive these incentive stock options, how many
options they will receive, the term of the options, the exercise price and other conditions
relating to the exercise of the options. Stock options granted under the plan must be
exercised within a maximum of 10 years from the date of grant at an exercise price that is
not less than the fair market value of the common shares on the date of the grant. Options
granted to shareholders owning more than 10% of our outstanding common shares must be
exercised within five years from the date of grant and the exercise price must be at least
110% of the fair market value of the common shares on the date of the grant.In July 2004 the Board of Directors approved the adoption of the 2004 Stock Option Plan. The
2004 Stock Option Plan provides for the grant of options to purchase up to 500,000 shares of
Milestones common stock. Options may be granted to employees, officers, directors and
consultants of Milestone for the purchase of common stock of Milestone at a price not less
than the fair market value of the common stock on the date of the grant. In general, options
become exercisable over a three-year period from the grant date and expire five years after
the date of grant.(2)
    
    The aggregate individual option grants outside the Stock Option Plan referred to in the
table above include options issued as payment for services rendered to us by outside
consultants and providers of certain services. The aggregate individual warrant grants
referred to in the table above include warrants granted to investors in Milestone as part of
private placements and credit line arrangements. 32




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##### Table of Contents



Stock Plan
   
    
    for consulting services, 17,493 shares valued at $20,250; and
    
    as part of annual compensation and severance, 80,596 shares valued at $85,583 were
issued to three employees and two former employees.
  
 Item 12. Certain Relationships and Related Transactions and Director Independence
  Director Independence
   
 Item 13. Exhibits
 Exhibits
  33




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##### Table of Contents



EXHIBITNO.
    
    DESCRIPTION3.1
    
    Certificate of Incorporation of Milestone (1)3.2
    
    Certificate of Amendment filed July 13, 1995 (2)3.3
    
    Certificate of Amendment filed December 6, 1996 (3)3.4
    
    Certificate of Amendment filed December 17, 1997 (4)3.5
    
    Certificate of Amendment filed July 23, 2003 (6)3.6
    
    Certificate of Amendment filed January 8, 2004. (6)3.7
    
    Certificate of Designation filed January 15, 2004 (6)3.8
    
    By-laws of Milestone (1)4.1
    
    Specimen stock certificate (2)4.2
    
    Intentionally Left Blank4.3
    
    Form of warrant agreement, including form of warrant (8)10.1
    
    Lease dated November 25, 1996 between Livingston Corporate Park Associates, L.L.C. and
Milestone (3)10.2
    
    Agreement with DaVinci Systems dated July 30, 2003 (6)10.3
    
    Agreement with Strider dated September 3, 2003 (6)10.4
    
    Agreement with Len Osser and K. Tucker Andersen, dated October 9, 2003 (6)10.5
    
    Agreement with Morse, Zelnick, Rose & Lander dated December 22, 2003 (6)10.6**
    
    Employment Agreement with Leonard Osser dated December 20, 2003 (6)10.7
    
    Agreement with United Systems dated October 20, 2004 (9)10.8
    
    Agreement with Mark Hochman dated as of January 1, 2005 (9)10.9
    
    Lease amendment dated April 28, 2004 between Livingston Corporate Park Associates, L.L.C. and
Milestone (9)10.10
    
    Agreement with DaVinci regarding
exclusive license over patented products dated June 1, 2004 (10)14
    
    Code of Ethics (7)23.1
    
    Consent of Eisner LLP*31.1
    
    Rule 13a-14(a) Certifications  Chief Executive Officer*31.2
    
    Rule 13a-14(a) Certifications  Chief Financial Officer*32.1
    
    Section 1350 Certifications Chief Executive Officer*32.2
    
    Section 1350 Certifications Chief Financial Officer*
 
 *
    
    Filed herewith.**
    
    Indicates management contract or compensatory plan or arrangement(1)
    
    Incorporated by reference to Milestones Registration Statement on Form SB-2 No. 33-92324.(2)
    
    Incorporated by reference to Amendment No. 1 to Milestones Registration Statement on Form
SB-2 No. 333-92324.(3)
    
    Incorporated by reference to Milestones Form 10-KSB for the year ended December 31, 1996.(4)
    
    Incorporated by reference to Milestones Form 10-KSB for the year ended December 31, 1999.(5)
    
    Incorporated by reference to Milestones Registration Statement on Form S-2 No. 333-110376,
Amendment No. 1.(6)
    
    Incorporated by reference to Milestones Registration Statement on Form S-2 No. 333-110376,
Amendment No. 3.(7)
    
    Incorporated by reference to Milestones Form 10-KSB for the year ended December 31, 2003. 34




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##### Table of Contents



(8)
    
    Incorporated by reference to Milestones Registration Statement on Form S-2 No. 333-110367,
Amendment No. 5.(9)
    
    Incorporated by reference to Milestones Form 10-KSB for the year ended December 31, 2004.(10)
    
    Incorporated by reference to Milestones Form 10-KSB for
the year ended December 31, 2005. 35




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##### Table of Contents



Item 14. Principal Accountant Fees and Services
 Audit Fees
  Audit Related Fees
  Tax Fees
  All Other Fees
  Audit Committee Administration of the Engagement
  Audit Committee Pre-Approval Policies and Procedures
  36




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##### Table of Contents



SIGNATURES
  Milestone Scientific Inc.By:
    /s/ Leonard OsserChairman and Chief Executive Officer   Signature
    
    
    
    Date
    
    Title/s/ Leonard Osser

Leonard Osser
    
    
    
    April 2, 2007
    
    Chairman, and Chief Executive Officer/s/ David Cohn

David Cohn
    
    
    
    April 2, 2007
    
    Chief Financial Officer/s/ Leonard Schiller

Leonard Schiller
    
    
    
    April 2, 2007
    
    Director/s/ Jeffrey Fuller

Jeffrey Fuller
    
    
    
    April 2, 2007
    
    Director/s/ Leslie Bernhard

Leslie Bernhard
    
    
    
    April 2, 2007
    
    Director
 37




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Balance Sheet as of December 31, 2006
    
    
    F-3Statements of Operations for the years ended December 31, 2006 and 2005
    
    
    F-4Statements of Changes in Stockholders Equity for the
years ended December 31, 2006 and 2005
    
    
    F-5Statements of Cash Flows for the years ended December 31, 2006 and 2005
    
    
    F-6Notes to Financial Statements
    
    
    F-7
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
 F-2




---



##### Table of Contents



ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,160,116Accounts receivable , net of allowance for doubtful accounts of $16,519
    
    
    346,619Royalty receivable
    
    
    60,107Inventories
    
    
    1,323,338Advances to contract manufacturer
    
    
    1,077,871Prepaid expenses
    
    
    97,073Total current assets
    
    
    4,065,124Investment in distributor, at cost
    
    
    76,319Equipment, net of accumulated depreciation of $402,914
    
    
    459,259Patents, net of accumulated amortization of $41,938
    
    
    526,753Other assets
    
    
    14,153Total assets
    
    $
    5,141,608LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,196,107Accrued expenses
    
    
    232,076Total current liabilities
    
    
    1,428,183Commitments (Note M)Stockholders EquityCommon stock, par value $.001; authorized 50,000,000 shares; 11,692,636
shares issued, 337,036 shares to be issued, and 11,659,303 shares outstanding
    
    
    12,031Additional paid-in capital
    
    
    57,720,129Accumulated deficit
    
    
    (53,107,219
    )Treasury stock, at cost, 33,333 shares
    
    
    (911,516
    )Total stockholders equity
    
    
    3,713,425Total liabilities and stockholders equity
    
    $
    5,141,608
  F-3




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##### Table of Contents



2006
    
    
    2005Product sales, net
    
    $
    5,566,425
    
    
    $
    5,775,394Royalty income
    
    
    277,752
    
    
    
    657,754Total revenue
    
    
    5,844,177
    
    
    
    6,433,148Cost of products sold
    
    
    3,002,615
    
    
    
    2,521,022Royalty expense
    
    
    33,031
    
    
    
    78,930Total cost of revenue
    
    
    3,035,646
    
    
    
    2,599,952Gross profit
    
    
    2,808,531
    
    
    
    3,833,196Selling, general and administrative expenses
    
    
    5,326,032
    
    
    
    6,794,032Research and development expenses
    
    
    1,005,285
    
    
    
    286,2606,331,317
    
    
    
    7,080,292Loss from operations
    
    
    (3,522,786
    )
    
    
    (3,247,096
    )Other incomeOther income
    
    
    283,107
    
    
    
    400,000Interest income
    
    
    87,411
    
    
    
    92,869Total other income
    
    
    370,518
    
    
    
    492,869Net loss
    
    
    (3,152,268
    )
    
    
    (2,754,227
    )Dividends applicable to preferred stock
    
    
    
    
    
    
    (1,691
    )Net loss applicable to common stockholders
    
    $
    (3,152,268
    )
    
    $
    (2,755,918
    )Loss per share applicable to common stockholders -
basic and diluted
    
    $
    (0.27
    )
    
    $
    (0.25
    )Weighted average shares outstanding and to be issued -
basic and diluted
    
    
    11,788,690
    
    
    
    11,007,755
  F-4




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##### Table of Contents



AdditionalPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    TreasuryShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Stock
    
    
    TotalBalance January 1, 2005
    
    
    25,365
    
    
    $
    25
    
    
    
    9,824,287
    
    
    $
    9,824
    
    
    $
    52,618,913
    
    
    $
    (47,196,539
    )
    
    $
    (911,516
    )
    
    $
    4,520,707Common stock and options issued
for payments of patent rights acquired
    
    
    
    
    
    
    
    
    
    
    43,424
    
    
    
    44
    
    
    
    98,122
    
    
    
    
    
    
    
    
    
    
    
    98,166Common stock issued for payment of
vendor services
    
    
    
    
    
    
    
    
    
    
    156,098
    
    
    
    156
    
    
    
    306,219
    
    
    
    
    
    
    
    
    
    
    
    306,375Common stock and options issued for
payment of consulting services
    
    
    
    
    
    
    
    
    
    
    139,362
    
    
    
    140
    
    
    
    348,583
    
    
    
    
    
    
    
    
    
    
    
    348,723Common stock issued for payment of
employee compensation
    
    
    
    
    
    
    
    
    
    
    23,461
    
    
    
    23
    
    
    
    44,977
    
    
    
    
    
    
    
    
    
    
    
    45,000Common stock issued for exercised options
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    0
    
    
    
    749
    
    
    
    
    
    
    
    
    
    
    
    749Common shares to be issued in
settlement of deferred compensation
    
    
    
    
    
    
    
    
    
    
    207,726
    
    
    
    208
    
    
    
    299,792
    
    
    
    
    
    
    
    
    
    
    
    300,000Proceeds from equity financings, net
    
    
    
    
    
    
    
    
    
    
    1,356,440
    
    
    
    1,356
    
    
    
    3,451,357
    
    
    
    
    
    
    
    
    
    
    
    3,452,713Conversion of preferred stock
    
    
    (25,365
    )
    
    
    (25
    )
    
    
    4,391
    
    
    
    4
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    Stock dividends applied to preferred stock
    
    
    
    
    
    
    
    
    
    
    2,683
    
    
    
    3
    
    
    
    4,182
    
    
    
    (4,185
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,754,227
    )
    
    
    
    
    
    
    (2,754,227
    )Balance, December 31, 2005
    
    
    
    
    
    
    
    
    
    
    11,758,205
    
    
    
    11,758
    
    
    
    57,172,915
    
    
    
    (49,954,951
    )
    
    
    (911,516
    )
    
    
    6,318,206Common stock and options issued for
payment of consulting services
    
    
    
    
    
    
    
    
    
    
    8,491
    
    
    
    9
    
    
    
    204,822
    
    
    
    
    
    
    
    
    
    
    
    204,831Common stock issued for payment of
vendor services
    
    
    
    
    
    
    
    
    
    
    53,070
    
    
    
    53
    
    
    
    57,197
    
    
    
    
    
    
    
    
    
    
    
    57,250Common stock and options issued for
payment of employee compensation
    
    
    
    
    
    
    
    
    
    
    80,596
    
    
    
    81
    
    
    
    135,325
    
    
    
    
    
    
    
    
    
    
    
    135,406Common shares to be issued in
settlement of deferred compensation
    
    
    
    
    
    
    
    
    
    
    129,310
    
    
    
    130
    
    
    
    149,870
    
    
    
    
    
    
    
    
    
    
    
    150,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (3,152,268
    )
    
    
    
    
    
    
    (3,152,268
    )Balance, December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    12,029,672
    
    
    $
    12,031
    
    
    $
    57,720,129
    
    
    $
    (53,107,219
    )

    
    $
    (911,516
    )
    
    $
    3,713,425
  F-5




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##### Table of Contents



2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (3,152,268
    )
    
    $
    (2,754,227
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation expense
    
    
    95,914
    
    
    
    99,060Amortization of patents
    
    
    22,849
    
    
    
    19,090Common stock and options issued for compensation, consulting,
and vendor services
    
    
    547,487
    
    
    
    700,098Bad debt (recovery) expense
    
    
    (10,846
    )
    
    
    33,111Changes in operating assets and liabilities:Accounts receivable
    
    
    11,292
    
    
    
    41,163Royalty receivable
    
    
    125,595
    
    
    
    (185,702
    )Inventories
    
    
    48,016
    
    
    
    (435,133
    )Advances to contract manufacturer
    
    
    (58,208
    )
    
    
    (957,629
    )Prepaid expenses
    
    
    12,618
    
    
    
    (5,129
    )Other assets
    
    
    10,044
    
    
    
    (3,789
    )Accounts payable
    
    
    688,063
    
    
    
    33,969Accrued expenses
    
    
    8,726
    
    
    
    (1,199
    )Deferred compensation
    
    
    
    
    
    
    150,000Net cash used in operating activities
    
    
    (1,650,718
    )
    
    
    (3,266,317
    )Cash flows from investing activities:Payment for capital expenditures
    
    
    (18,878
    )
    
    
    (23,092
    )Payment for patent rights
    
    
    (62,967
    )
    
    
    (306,317
    )Investment in distributor
    
    
    
    
    
    
    (6,363
    )Net cash used in investing activities
    
    
    (81,845
    )
    
    
    (335,772
    )Cash flows from financing activities:Proceeds from equity financing, net
    
    
    
    
    
    
    3,452,713Proceeds from exercise of option
    
    
    
    
    
    
    749Net cash provided by financing activities
    
    
    
    
    
    
    3,453,462NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,732,563
    )
    
    
    (148,627
    )Cash and cash equivalents at beginning of year
    
    
    2,892,679
    
    
    
    3,041,306Cash and cash equivalents at end of year
    
    $
    1,160,116
    
    
    $
    2,892,679
  F-6




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##### Table of Contents



MILESTONE SCIENTIFIC INC.
 
 NOTES TO FINANCIAL STATEMENTS
 NOTE A  ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
 The Wand CompuDent Wand Plus CompuMed. CompuDent CompuMed
  NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    Ionic White
          F-7




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##### Table of Contents



MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
                 F-8




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##### Table of Contents



MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
 .
    Share-Based Payment
   Net loss applicable to common stockholders
    
    $
    (2,755,918
    )Deduct total stock-based employee compensation
expenses determined under the fair value
based method for all awards*
    
    
    469,362Net loss applicable to common stockholders, pro forma
    
    $
    (3,225,280
    )Loss per share applicable to common stockholders:Basic and dilutedAs reported
    
    $
    (0.25
    )Pro forma
    
    $
    (0.29
    )
 
 *
    
    Excludes common stock issued as compensation.  F-9




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MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
 December 31,2006
    
    2005Volatility
    
    
    118
    %
    
    
    127
    %Risk-free interest rate
    
    
    4.6
    %
    
    
    4.0
    %Expected life
    
    4 years
    
    5 yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    CompuDent
   F-10




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MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
   Accounting for Certain Hybrid Financial Instruments  an amendment of FASB Statement No. 133
and 140
 Accounting Changes and Error Corrections
 Share-Based Payment
 Inventory Costs, an amendment of ARB No. 43,
Chapter 4 (FAS 151)
 F-11




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##### Table of Contents



MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
 NOTE C  INVENTORIES
 Inventories consist of the following:Finished goods
    
    $
    1,079,983Component parts and other materials
    
    
    243,355$
    1,323,338
  NOTE D  ADVANCES TO CONTRACT MANUFACTURER
  NOTE E EQUIPMENT
 Equipment consists of the following:Leasehold improvements
    
    $
    6,913Artwork
    
    
    85,550Office furniture and equipment
    
    
    101,092Trade show displays
    
    
    51,575Computers and software
    
    
    220,385Tooling equipment
    
    
    396,658Total
    
    
    862,173Less accumulated depreciation & amortization
    
    
    (402,914
    )$
    459,259
  NOTE F
 PATENTS
  NOTE G  INVESTMENT IN DISTRIBUTOR
  NOTE
H STOCKHOLDERS EQUITY
   F-12




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MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
                  F-13




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##### Table of Contents



MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
       NOTE I  STOCK OPTION PLANS
    WeightedWeighted
    
    
    Average
    
    
    AggregateNumber
    
    
    Average
    
    
    Remaining
    
    
    Intrinsicof
    
    
    Exercise
    
    
    Contractual
    
    
    OptionsOptions
    
    
    Price
    
    
    Life (Years)
    
    
    ValueOutstanding, January 1, 2006
    
    
    453,167
    
    
    
    2.63
    
    
    
    3.60
    
    
    
    Granted
    
    
    147,000
    
    
    
    1.12
    
    
    
    4.92
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    172,333
    
    
    
    3.26
    
    
    
    2.62
    
    
    
    Outstanding, December 31, 2006
    
    
    427,834
    
    
    
    1.85
    
    
    
    3.34
    
    
    $
    32,360Exercisable, December 31, 2006
    
    
    277,167
    
    
    
    2.05
    
    
    
    3.22
    
    
    $
    14,883
 WEIGHTED
    
    
    WEIGHTEDNUMBER
    
    
    AVERAGE
    
    
    AVERAGEOF
    
    
    EXERCISE
    
    
    GRANT DATEOPTIONS
    
    
    PRICE
    
    
    FAIR VALUEVested
OptionsOutstanding at beginning of period
    
    
    366,166
    
    
    $
    2.40Exercised
    
    
    0
    
    
    $
    0.00Vested Options
    
    
    75,334
    
    
    $
    2.84Expired
    
    
    (164,333
    )
    
    $
    3.18Outstanding at end of period
    
    
    277,167
    
    
    $
    2.05NONVESTED OPTIONSNonvested at beginning of period
    
    
    87,001
    
    
    $
    3.60
    
    
    $
    0.78Granted
    
    
    147,000
    
    
    $
    1.12
    
    
    $
    0.93Vested
    
    
    (75,334
    )
    
    $
    2.84
    
    
    $
    1.01Forfeited
    
    
    (8,000
    )
    
    $
    4.92
    
    
    $
    1.38Nonvested at end of period
    
    
    150,677
    
    
    $
    1.49
    
    
    $
    0.78
   WeightedWeighted
    
    
    Average
    
    
    AggregateNumber
    
    
    Average
    
    
    Remaining
    
    
    Intrinsicof
    
    
    Exercise
    
    
    Contractual
    
    
    OptionsOptions
    
    
    Price
    
    
    Life (Years)
    
    
    ValueOutstanding, January 1, 2006
    
    
    574,131
    
    
    
    4.11
    
    
    
    
    
    
    
    Granted
    
    
    100,000
    
    
    
    3.50
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    (151,665
    )
    
    
    5.78
    
    
    
    
    
    
    
    Outstanding, December 31, 2006
    
    
    522,466
    
    
    
    3.51
    
    
    
    3.17
    
    
    
    Exercisable, December 31, 2006
    
    
    310,910
    
    
    
    3.43
    
    
    
    3.17
    
    
    
    
 WEIGHTEDNUMBER
    
    
    AVERAGEOF
    
    
    EXERCISEOPTIONS
    
    
    PRICEVested OptionsOutstanding at beginning of period
    
    
    222,862
    
    
    $
    4.30Exercised
    
    
    0
    
    
    $
    0.00Vested Options
    
    
    139,711
    
    
    $
    3.56Expired
    
    
    (51,663
    )
    
    $
    2.55Outstanding at end of period
    
    
    310,910
    
    
    $
    3.43NONVESTED OPTIONSNonvested at beginning of period
    
    
    351,267
    
    
    $
    4.00Granted
    
    
    100,000
    
    
    $
    3.50Vested
    
    
    (139,711
    )
    
    $
    3.56Forfeited
    
    
    (100,000
    )
    
    $
    4.89Nonvested at end of period
    
    
    211,556
    
    
    $
    3.63
  F-14




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MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
 F-15




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##### Table of Contents



MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
 NOTE J  EMPLOYMENT CONTRACT AND DEFERRED COMPENSATION
   F-16




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##### Table of Contents



MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
  NOTE K  INCOME TAXES
   2006
    
    
    2005Current assetsAllowance for doubtful accounts
    
    $
    7,000
    
    
    $
    11,000Inventory allowance
    
    
    179,000
    
    
    
    11,000Deferred compensation
    
    
    150,000
    
    
    
    120,000Subtotal
    
    
    336,000
    
    
    
    142,000Valuation allowance
    
    
    (336,000
    )
    
    
    (142,000
    )Current deferred tax asset
    
    $
    
    
    
    $
    Non-current assetsNet operating loss carryforward
    
    $
    17,000,000
    
    
    $
    15,800,000Valuation allowance
    
    $
    (17,000,000
    )
    
    
    (15,800,000
    )Non-current deferred tax asset
    
    $
    
    
    
    $
    
   NOTE L  PRODUCT SALES AND SIGNIFICANT CUSTOMERS
  F-17




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##### Table of Contents



MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
 Year Ended December 31,2006
    
    
    2005CompuDent
    
    $
    1,461,692
    
    
    $
    1,869,841Handpieces
    
    
    3,815,641
    
    
    
    3,617,662Other
    
    
    289,092
    
    
    
    287,891$
    5,566,425
    
    
    $
    5,775,394United States
    
    $
    4,147,280
    
    
    $
    4,323,058Canada
    
    
    309,451
    
    
    
    338,255Other foreign
    
    
    1,109,694
    
    
    
    1,114,081$
    5,566,425
    
    
    $
    5,775,394
  Ionic White
 NOTE M  COMMITMENTS AND OTHER
 (1) Lease Commitments
   Year Ending December 31,2007
    
    $
    103,4842008
    
    
    100,8012009
    
    
    54,6962010
    
    
    9,5642011
    
    
    4,698$
    273,243
  (2) Contract Manufacturing Arrangement
 F-18




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##### Table of Contents



MILESTONE SCIENTIFIC INC.
 NOTES TO FINANCIAL STATEMENTS
 CompuDent CompuMed The Wand
  (3) Other Commitments
 SafetyWand CompuFlo CompuDent
 CoolBlue Ionic
White CoolBlue and Ionic White
 (4) Other Income
  NOTE N  RELATED PARTY TRANSACTIONS
  F-19